FIN 340 - Exam 1 & 2 UPDATED ACTUAL
Exam Questions and CORRECT Answers
When transactions deposits are used to make payments, the end result is usually_____. -
CORRECT ANSWER - An increase in the bank account of the payee and a decrease in the
bank account of the payer
An increase in the deposits of the payee's bank at the Fed and a decrease in the deposits of the
payer's bank at the Fed
One of the main reasons the Federal Reserve was created in 1913 was to _____. Only later did
the Federal Reserve begin to _____. - CORRECT ANSWER - Serve as a lender of last
resort to banks having liquidity problems; conduct monetary policy to benefit the overall
economy
The Federal Reserve differs from other central banks in that it has a relatively _____ structure,
which is reflected in the fact that _____. - CORRECT ANSWER - Decentralized; regional
Federal Reserve Banks have an important say in monetary policy
Most economists believe that the Fed and other central banks should enjoy _____ independence
from the rest of government to ensure that they _____. - CORRECT ANSWER -
Substantial; can resist political pressures to adopt overly easy monetary policies
One limit to the independence of the Fed is that _____. - CORRECT ANSWER - Its high-
level monetary goals have been set by Congress through the dual mandate
The diagram below shows reserve demand and reserve supply as functions of the federal funds
rate when the Fed implements monetary policy as described 1n' the textbook and class. The
reason the supply curve becomes horizontal at a federal funds rate of 10% is that _____. The
reason the demand curve becomes horizontal at a federal funds rate of 5% is that _____. -
CORRECT ANSWER - Banks can borrow reserves from the Fed at a rate of 10%; banks
can earn interest of 5% on excess reserves held at the Fed
, Suppose the reserves market is initially in equilibrium at point A with a federal funds rate of 5%.
If the equilibrium funds rate changes to 7.5%, it could be either because the Fed _____ or
because the Fed _____. - CORRECT ANSWER - Conducts open market sales of 200;
raises interest on excess reserves by 2.5 points
The type of equilibrium represented by point A in the diagram on the previous page is the type
that existed _____. The reason the reserves market was in this position was that _____. -
CORRECT ANSWER - During and after the financial crisis; the Fed had sharply
increased the supply of reserves as part of its easing of monetary policy
By "potential output," economists mean the level of output (real GDP) that _____. While the Fed
normally sets monetary policy to try to achieve this level of output, it may sometimes aims for a
lower level of output to _____. - CORRECT ANSWER - Can be produced when
unemployment is at the natural rate, with no upward or downward
pressure on inflation; decrease inflation when it has become too high
In fulfilling its monetary policy responsibilities, the Fed interprets price stability to mean a
_____ rate of inflation because _____. - CORRECT ANSWER - Low and stable; if
inflation were zero, the Fed would have to set a lower nominal interest rate target, giving it less
ammunition to fight a recession if one occurred
Suppose the nominal interest rate is 3% and the expected rate of inflation is 5%. Then the real
interest rate is approximately _____%. Because this measure uses expected rather than actual
inflation, it is sometimes referred to as the _____ real interest rate. - CORRECT
ANSWER - -2; ex ante
The diagram below shows aggregate expenditure as a function of the real interest rate, r. Which
of the following are reasons why the curve is downward sloping? - CORRECT
ANSWER - An increase m' the real interest rate increases the cost to businesses of
financing investment projects.
An increase in the real interest rate causes people to save more and thus consume less.
Exam Questions and CORRECT Answers
When transactions deposits are used to make payments, the end result is usually_____. -
CORRECT ANSWER - An increase in the bank account of the payee and a decrease in the
bank account of the payer
An increase in the deposits of the payee's bank at the Fed and a decrease in the deposits of the
payer's bank at the Fed
One of the main reasons the Federal Reserve was created in 1913 was to _____. Only later did
the Federal Reserve begin to _____. - CORRECT ANSWER - Serve as a lender of last
resort to banks having liquidity problems; conduct monetary policy to benefit the overall
economy
The Federal Reserve differs from other central banks in that it has a relatively _____ structure,
which is reflected in the fact that _____. - CORRECT ANSWER - Decentralized; regional
Federal Reserve Banks have an important say in monetary policy
Most economists believe that the Fed and other central banks should enjoy _____ independence
from the rest of government to ensure that they _____. - CORRECT ANSWER -
Substantial; can resist political pressures to adopt overly easy monetary policies
One limit to the independence of the Fed is that _____. - CORRECT ANSWER - Its high-
level monetary goals have been set by Congress through the dual mandate
The diagram below shows reserve demand and reserve supply as functions of the federal funds
rate when the Fed implements monetary policy as described 1n' the textbook and class. The
reason the supply curve becomes horizontal at a federal funds rate of 10% is that _____. The
reason the demand curve becomes horizontal at a federal funds rate of 5% is that _____. -
CORRECT ANSWER - Banks can borrow reserves from the Fed at a rate of 10%; banks
can earn interest of 5% on excess reserves held at the Fed
, Suppose the reserves market is initially in equilibrium at point A with a federal funds rate of 5%.
If the equilibrium funds rate changes to 7.5%, it could be either because the Fed _____ or
because the Fed _____. - CORRECT ANSWER - Conducts open market sales of 200;
raises interest on excess reserves by 2.5 points
The type of equilibrium represented by point A in the diagram on the previous page is the type
that existed _____. The reason the reserves market was in this position was that _____. -
CORRECT ANSWER - During and after the financial crisis; the Fed had sharply
increased the supply of reserves as part of its easing of monetary policy
By "potential output," economists mean the level of output (real GDP) that _____. While the Fed
normally sets monetary policy to try to achieve this level of output, it may sometimes aims for a
lower level of output to _____. - CORRECT ANSWER - Can be produced when
unemployment is at the natural rate, with no upward or downward
pressure on inflation; decrease inflation when it has become too high
In fulfilling its monetary policy responsibilities, the Fed interprets price stability to mean a
_____ rate of inflation because _____. - CORRECT ANSWER - Low and stable; if
inflation were zero, the Fed would have to set a lower nominal interest rate target, giving it less
ammunition to fight a recession if one occurred
Suppose the nominal interest rate is 3% and the expected rate of inflation is 5%. Then the real
interest rate is approximately _____%. Because this measure uses expected rather than actual
inflation, it is sometimes referred to as the _____ real interest rate. - CORRECT
ANSWER - -2; ex ante
The diagram below shows aggregate expenditure as a function of the real interest rate, r. Which
of the following are reasons why the curve is downward sloping? - CORRECT
ANSWER - An increase m' the real interest rate increases the cost to businesses of
financing investment projects.
An increase in the real interest rate causes people to save more and thus consume less.
